Disclaimer: This article makes several assumptions that are not realistic, such as growth rates being maintained indefinitely and share prices remaining stagnant. These are used solely to illustrate how dividend income from certain investments could increase over time based on current metrics. I cannot predict the future, so readers should keep in mind that growth rates and share prices are likely to change. This is not financial advice; always conduct your own research.
Dividend investing has long been revered as a cornerstone of wealth-building strategies. The concept of channeling capital into companies with proven track records of steadily increasing their annual dividends appeared to be an ideal way to cultivate a reliable passive income stream. From my own perspective, I've always been drawn to income-focused investing, as I don't own rental properties or income-generating businesses. Instead, the allure lies in equities that allow me to participate in corporate earnings through consistent dividend payouts.
Over time, however, my preferences have evolved, leading me to favor either high-yield ETFs and closed-end funds (CEFs) or ETFs that have a modest dividend yield with a high growth rate over individual stocks. Ultimately, it boils down to simple mathematics: prioritizing stocks with lengthy histories of modest dividend growth no longer holds the same appeal. In this analysis, I'll crunch the numbers and explain why the traditional model from decades past has lost its luster, thanks to innovative products from investment firms specifically designed to either maximize income generation or annualized dividend growth.
Short-Term Comparison (6 Years)
Since I can't predict the future share price of the investments, I am going to use I am going to make the following assumptions:
· Investor XYZ will not reinvest the dividends/distributions as they will take the income as its generated
· Investor XYZ will allocate $100,000 as the initial investment
· The share price will remain static over a 6-year period, so I can outline the dividend growth over 5-years
The investments I am going to compare are:
· Johnson & Johnson (JNJ)
· Schwab U.S. Dividend Equity ETF (SCHD)
· Altria Group (MO)
· NEOS Nasdaq 100 High Income ETF (QQQI)
· JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)
Johnson & Johnson
· $5.20 annual dividend
· 62 years of dividend growth
· 5.40% 5-year average growth rate
By allocating $100,000 to JNJ you would be able to purchase 559.165 shares. In the first year there would be $2,907.63 of dividend income generated. If the 5-year dividend growth rate stayed the same the annualized dividend would increase by 30.08% ($1.56) over the next 5 years to $6.76. In the 6th year there would be $3,782.18 of dividend income generated and over the 6-year period $19,977.53 of dividend income would be produced. This is a 19.98% yield on cost over 6 years.
Schwab U.S. Dividend Equity ETF
· $1.03 annual dividend
· 13 years of dividend growth
· 10.87% 5-year average growth rate
By allocating $100,000 to SCHD you would be able to purchase 3,635.04 shares. In the first year there would be $3,744.09 of dividend income generated. If the 5-year dividend growth rate stayed the same the annualized dividend would increase by 67.52% ($0.70) over the next 5 years to $1.73. In the 6th year there would be $6,272.16 of dividend income generated and over the 6-year period $29,529.41 of dividend income would be produced. This is a 29.53% yield on cost over 6 years.
Altria Group
· $4.08 annual dividend
· 56 years of dividend growth
· 3.96% 5-year average growth rate
By allocating $100,000 to MO you would be able to purchase 1,479.73 shares. In the first year there would be $6,037.29 of dividend income generated. If the 5-year dividend growth rate stayed the same the annualized dividend would increase by 21.43% ($0.87) over the next 5 years to $4.95. In the 6th year there would be $7,331.17 of dividend income generated and over the 6-year period $40,004.95 of dividend income would be produced. This is a 40% yield on cost over 6 years.
JPMorgan Nasdaq Equity Premium Income ETF
· $6.20 annual dividend
· 0 years of dividend growth
· 0% 5-year average growth rate
By allocating $100,000 to JEPQ you would be able to purchase 1,813.57 shares. In the first year there would be $11,244.11 of distribution income generated. Since there is no distribution growth, assuming the TTM distribution stayed the same the amount of income generated over the 6-year period would be $67,464.64. This is a 67.46% yield on cost over 6 years.
NEOS Nasdaq 100 High Income ETF
· $7.35 annual dividend
· 0 years of dividend growth
· 0% 5-year average growth rate
By allocating $100,000 to QQQI, you would be able to purchase 1,911.68 shares. In the first year there would be $14,050.85 of distribution income generated. Since there is no distribution growth, assuming the TTM distribution stayed the same the amount of income generated over the 6-year period would be $84,305.85. This is a 84.31% yield on cost over 6 years.
Over the short term, it will be next to impossible for an individual equity to catch a high-yielding asset unless there is a massive annualized growth rate. The math clearly indicates that income investors would be leaving a lot of income on the table, going with traditional equities such as JNJ or MO over QQQI or JEPQ over a short duration.
The math also doesn't favor prioritizing track records spanning decades with low annualized growth over large yields or high annualized dividend growth
QQQI would currently produce $14,050.85 in distributions from a $100,000 investment. For JNJ to get to this level, it would need to sustain a dividend growth rate of 5.4% for 30 years after the initial year to reach an annualized dividend of $14,085.01. Over this period, JNJ would generate $221,073.49 of dividend income while QQQI produced $435,576.37 of distributions.
When I build out the table for MO, if it were to sustain a dividend growth rate of 3.96% for 30 years, it would reach an annualized dividend of $19,356.65, which is more than QQQI. Over this period, MO would generate $355,704.03 of dividend income while QQQI produced $435,576.37 in distributions. QQQI would still generate an additional $79,872.34 in dividend income.
SCHD had an initial dividend yield that was close to JNJ and significantly lower than MO, but its 10.87% annualized growth is a showstopper if it can be maintained. Over the same period, SCHD could grow its annualized dividend to $82,750.01 from $3,744.09, which is significantly larger than JNJ, MO, and QQQI while generating $809,575.38 of dividend income.
Conclusion
When I break down the math, I don't believe investing in income-producing equities has the same appeal as it once did. There are too many solid income products like QQQI and JEPQ that are establishing track records of producing double-digit annualized yields. From an annualized perspective, investment products such as QQQI and JEPQ have become very appealing. If an investor was willing to let the capital sit in an investment such as JNJ and capture 26 years of dividend growth, assuming the growth rate stayed the same, the annual income would eventually catch up to QQQI, but there would be 6-figures worth of income left on the table over the years. A high-growth dividend fund such as SCHD would blow the doors off of all of these investments from an income perspective if someone had 26 additional years after the first year to allow the powers of compounding to work in their favor, as SCHD's annualized dividend would grow from $1.03 to $15.07 if the same growth rate were maintained. Over the same period, where JNJ's annual dividend increased to $11,412.86 and MO's increased to $16,571.62, SCHD's would grow to $54,766.11 and generate hundreds of thousands in additional income along the way. Income investing has changed in my opinion, and I believe that depending on what the investment goals are, investment products such as SCHD, QQQI, and JEPQ are becoming more popular for very good reasons, and this is why I am gravitating toward them.
My Disclosures:
I am invested in MO, SCHD, JEPQ, and QQQI. I do not own JNJ
Disclaimer:
This article makes a lot of assumptions that are likely not to come true. This is just an exercise to based on math about income investing. Investors should do their own due diligence. I am not an investment advisor or professional. This article is my own personal opinion and is not meant to be a recommendation of the purchase or sale of stock. The investments and strategies discussed within this article are solely my personal opinions and commentary on the subject. This article has been written for research and educational purposes only. Anything written in this article does not take into account the reader's particular investment objectives, financial situation, needs, or personal circumstances and is not intended to be specific to you. Investors should conduct their own research before investing to see if the companies discussed in this article fit into their portfolio parameters. Just because something may be an enticing investment for myself or someone else, it may not be the correct investment for you.